Question

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $58 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.50
Direct labor		11.00
Variable manufacturing overhead		2.10
Fixed manufacturing overhead		4.00	($348,000 total)
Variable selling expenses		3.70
Fixed selling expenses		4.00	($348,000 total)
Total cost per unit	$	33.30

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 104,400 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 20% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 104,400 Daks each year. A customer in a foreign market wants to purchase 17,400 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $10,440 for permits and licenses. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. What is the break-even price per unit on this order?

Answer 1

Solution 1-a:
Computation of Contribution Margin per unit
Selling price per unit		58.00
Less: variable expenses:
Direct materials	8.50
Direct labor	11.00
Variable manufacturing Overhead	2.10
Variable selling expense	3.70	25.30
Contribution margin per unit		32.70
Increased Sales In units (87000*20%)	17400
Contribution margin per unit	$32.70
Incremental Contribution margin	$568,980.00
Less: Additional Fixed selling expense	$140,000.00
Incremental Net Operating Income	$428,980.00
Solution 1-b:
Yes, Additional investment would be justified.
Solution 2:
Variable Manufacturing Cost per unit	$21.60
Import Duties per unit	$3.70
Permits and licenses ($10,440/17400)	$0.60
Shipping cost per unit	$1.60
Break even price per unit	$27.50